Citation: 2010 TCC 561
Date: 20101103
Docket: 2010-686(IT)I
BETWEEN:
LISA DALE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
These are appeals from
reassessments for the appellant’s 2005 and 2006 taxation years made by the
Minister of National Revenue (Minister) under the Income Tax Act
(ITA). In so reassessing, the Minister disallowed, among other things,
motor vehicle expenses in the amounts of $3,866 for 2005 and $2,950 for 2006
claimed by the appellant against her sales commission income for those years.
[2]
It is not disputed that the
appellant is, and was in those years, a self-employed residential real estate
agent registered with RE/MAX Aboutowne Realty Corporation (RE/MAX) in Oakville,
Ontario, and that she was remunerated on a commission basis. During the 2005
and 2006 taxation years, she earned $81,440 and $79,552 respectively in
commissions, and claimed business expenses in the amounts of $74,105 and
$54,204, of which the Minister disallowed $4,888 and $3,793 for each of those
years respectively. The appellant takes issue only with the disallowance of motor
vehicle expenses.
[3]
It is not disputed that the
appellant drove a total of 31,185 and 23,693 kilometres in 2005 and 2006
respectively. She argued that 95% of those kilometres were driven for business
purposes, and it was on that basis that she claimed motor vehicle expenses in
the amount of 8 151 $ for 2005 and 6 201 $ for 2006.
However, she did not keep a log book or any other record of how many kilometres
were driven for business purposes. As a result, the minister only accepted 55%
of the total kilometres as having been driven for business purposes, which
explains why $3,866 and $2,950 for 2005 and 2006 respectively were disallowed
out of the total motor vehicle expenses initially claimed (see Reply to the
Notice of Appeal, Schedules A and B).
[4]
The only issue before me is
whether 95% of the total distance driven by the appellant in each of the years
in question was in fact driven for business purposes.
[5]
The appellant submits that it is
not a requirement of the ITA that a log book be kept, and that the Minister
arbitrarily decided that, absent a log book, she was not entitled to claim more
than 55% as a business expense. She intended to call John Meehan, a licensed
real estate agent and sole owner and manager of RE/MAX Unique Real Estate since
1996, as an expert witness to testify regarding the driving habits of
self-employed real estate agents, and more particularly regarding the impracticality
of keeping a log book as seems to be required by the Minister.
[6]
The respondent brought a motion
for an order excluding the admission into evidence of the expert report and the
testimony of John Meehan on the basis that this evidence would distract from
the real issue here, which is the business use of the motor vehicle by the
appellant in 2005 and 2006. The respondent relied on the Supreme Court of
Canada decision in R. v. Mohan, [1994] S.C.J. No. 36 (QL);
[1994] 2 S.C.R. 9. In that case, the Supreme Court said that
expert evidence should not be admitted where there is a danger that it will be
misused or will distort the fact-finding process. It referred to another
Supreme Court decision, R. v. Abbey, [1982] 2 S.C.R. 24, in which it was
said, at page 42, that “[i]f on the proven facts a judge or jury can form
their own conclusions without help, then the opinion of the expert is
unnecessary” (citing R. v. Turner (1974), 60 Crim. App. R. 80, at page
83). In Mohan, at paragraph 22 (QL), the Supreme Court stated that
the expert opinion is necessary if it provides information which is likely to
be outside the experience and knowledge of a judge. The court also spoke of the
concern that experts be not permitted to usurp the functions of the trier of
fact (paragraph 24 QL).
[7]
In the present case, the
respondent stresses on the fact that the question at issue concerns the
business use of the motor vehicle by the appellant, which is purely a question
of fact, for which there is no need for an expert. Furthermore, the respondent
challenges the report as such as it relies on the opinion of others, including
counsel for the appellant.
[8]
With respect to the opinion of
counsel for the appellant, counsel for the respondent quotes McColl J. in Surrey
Credit Union v. Willson, 45 B.C.L.R. (2d) 310 (B.C.S.C.), referred to by
McArthur J. of this Court in Brampton Vee World Motors Ltd. v. Canada, [2004] T.C.J. No. 652 (QL), at paragraph 4.
McColl J. stated the following:
Expert opinions will be rendered inadmissible when
they are nothing more than the reworking of the argument of counsel participating
in the case. Where an argument clothed in the guise of an expert's opinion is
tendered it will be rejected for what it is.
[9]
With respect to the reference by
Mr. Meehan in his report to Mr. Valeri Volkov, a certified public
accountant, counsel for the respondent stated that it was not admissible as Mr.
Volkov was not present to be cross-examined.
[10]
Both counsel for the appellant and
Mr. Volkov are practitioners apparently specializing in the real estate industry.
In his report, Mr. Meehan relied on their assessment regarding the
practical aspects of agents’ maintaining an automobile log book. I decided in
court to accept Mr. Meehan’s testimony and report, but only with respect to his
factual knowledge of the driving habits of sales agents, as he himself had been
a sales agent for many years and is now managing a broker’s office and dealing
with many sales agents. All references to advice received from counsel for the
appellant and Mr. Volkov, and all references to Mr. Meehan’s personal opinion
as to what is required and what should be considered as reasonable under the
ITA will be struck out since, as regards the former, it has nothing to do with
Mr. Meehan’s own knowledge and experience as a sales agent, manager and
broker, and, as regards the latter, it is not his function but mine to decide
whether the assessment is valid under the ITA.
[11]
That being said, Mr. Meehan was in
fact put on the stand by counsel for the appellant, and his report was entered
as Exhibit A-1, but only for consideration of the portions related to his
testimony before me. Mr. Meehan testified that he had been a licensed real
estate agent in Ontario since 1983. In 1989, he became a manager for Royal
Lepage Real Estate Services and since 1996 has been the sole owner and manager of
his own office, RE/MAX Unique Real Estate, and has had an average of 55 agents under
contract with that office over 15 years.
[12]
Mr. Meehan described the work of
real estate sales agents as consisting in visiting as many houses as possible
and attending open houses for agents only from Monday to Saturday, from 11 a.m.
to 1 p.m., so as to have an idea of the inventory of properties for sale. Since
2000, sales agents have access to the Multiple Listing Service (MLS)
from their home office or from their off‑site offices, which means that
they do not need to go to the RE/MAX office as often as in the past. He
personally reduced by half the floor area of his RE/MAX office since he does
not need as many computer monitors (he now has 3 compared to 15 to 20 before
2000) for use by his sales agents, who now very seldom go to the office to
access MLS. He said that a sales agent drives around looking at houses, meeting
clients or other agents, and taking clients to visit houses in the evenings. If
a client makes an offer, the agent goes back to his office, prepares the offer,
registers it and goes to present it to the seller. When the initial offer is
not acceptable to the seller, the agent goes back and forth between the seller
and prospective purchaser, or may fax back and forth if that possibility is
available, until the offer is accepted. When the agent obtains a listing, he or
she arranges an open house, meets with prospective buyers and shows the house.
[13]
Mr. Meehan testified that most of
his sales agents work eight to ten hours a day and that they work on weekends.
He basically said that the agents are in their car from morning until night.
With respect to log books, he said that real estate sales agents do not
generally keep records of their mileage, as it is not realistic or practical to
do so. He himself never kept a log book. He was not able to say how many hours
a high-performing real estate agent spends in his or her car. He could only
assume that it would be 80 to 95 per cent of their working time.
[14]
Mr. Meehan stated that he was not
familiar with real estate agents’ work in Hamilton, which is the area covered by the appellant. He noted,
however, that the price of houses there was significantly less than in Toronto.
[15]
In cross-examination, he
acknowledged that he had no idea how burdensome it would be to keep a log book
for a full tax year. He admitted that he did not accompany his agents to verify
what their actual driving time was. He could only estimate that time. He
recognized that he had not himself been a sales agent for the past 21 years,
and that things had changed considerably over that period.
[16]
In re‑examination, he stated
that a comparatively successful full-time real estate agent like the appellant
would make an average minimum of ten to fifteen trips in his or her car each
day of the year. In his report, he said that that included business and
personal trips (see Exhibit A-1, paragraph 15). Keeping a log book means
that you have to enter the starting point, the distance, the name of the
client, and then enter the same information for the return trip. He also stated
that the amount of driving has not changed over the years, but suggested that the
car has become for all intents and purposes an office. With social networking,
there is no need to go to the office as often as in the past.
[17]
The appellant then testified. She
said that she was licensed in 2000 and has been a full-time real estate agent
ever since. In 2005, she moved to Hamilton from Toronto and started working for a RE/MAX broker in
Oakville, which is half way between Toronto and Hamilton and was approximately
40 km from her new residence. She lived with her boyfriend in a flat and rented
a separate room in the same building that she used as office space, where she had
a computer, a fax machine, filing cabinets for her records, and a phone line.
She went to the brokerage’s office to deliver signed offers. She paid RE/MAX for
the use of a workstation that was assigned to her at the brokerage and she kept
personal effects in a drawer there. That workstation was in a space that she
shared with other agents. She also had a direct phone line at RE/MAX and
received "junk" mail there. However, RE/MAX charged her for long
distance calls and for the use of the photocopier machine. She said that she
probably went to the RE/MAX office once a month (transcript, p. 124).
[18]
In terms of personal driving, she
claims that she practically never drove for personal needs. She lives across from
a mall where she has access to almost everything she needs. Her friend drives a
Toyota Corolla and whenever they go out together, which is fairly rare, they
use his car. She did not take any holidays in the years at issue, other than
statutory holidays. She said that she worked "pretty much from the time [her]
eyes open[ed] until they shut" (transcript, p. 60), i.e. from 10 to
16 hours a day (transcript, p. 107). She would briefly visit her mother in
Toronto when her work took her there.
[19]
In terms of driving for work
purposes, she drove a 1992 Lexus (see Question 3 in Exhibit 2 to Exhibit A‑1).
In the years at issue, she was not familiar with the market in Hamilton and its
environs. She had to visit 20 to 30 houses to fix an accurate price on a newly
listed house. She visited neighbourhoods and homes on a constant basis. She
said that for every client there were two or three potential clients who slipped
through her fingers. When she represented a buyer, she would visit 25 to 30
houses beforehand, of which she would show that client only a few. She also
held open houses in Oakville for other agents on weekends in order to try to and
get higher‑priced listings. She advertised in Toronto and had
listings in Etobicoke, Richmond Hill and Stoney
Creek. In the years in question, she had
a potential commercial client who was looking for multiple properties in
downtown Toronto. If successful, she could have earned $50,000 to
$60,000 from that client, but nothing materialized. Still, a lot of driving had
been required. She had also had clients who were selling their home in Hamilton
and looking for a new home in Toronto. In addition, she attended conferences and training
seminars in Mississauga, Guelph and Markham. She estimated her time spent in her car for work purposes
at from eight to twelve hours a day.
[20]
According to her, it is a
mathematical impossibility that she could have been in her car for personal purposes
45 per cent of the time as argued by the respondent. She said that she had attempted
to keep a log book several times but was not able to keep it up. The result
would have been that either she "would lose all of [her]
clients" or that "it would bottleneck [her]
performance" (see transcript, p. 77).
[21]
The appellant produced in evidence
her sales records (Exhibit 3 to the report filed as Exhibit A-1). In the first
quarter of 2005, she had zero sales. She explained that there were two reasons
for that: 1) she was starting in a new territory; and 2) it takes on average
three months for a sale to close. In the second quarter of 2005, she made two
sales, for which she represented both the seller and the buyer. She received over
$18,000 in commissions for those two sales. In the third quarter of 2005, she had
five sales, with total commissions of $26,310. In the fourth quarter of 2005,
she made six sales and earned $37,230 in commissions.
[22]
In 2006 (Exhibit 4 to Exhibit
A-1), she earned $10,480 for two sales in the first quarter, $18,250 for three
sales in the second quarter, $13,000 for two sales in the third quarter, and
$42,197, for nine sales in the last quarter.
[23]
She said that real estate is
extremely cyclical. For quite a few transactions, she represented both the
buyer and seller, which means a lot of driving around. She also explained that
the chronology of the performance of her work was not necessarily reflected in
the closing dates of her sales (transcript, p. 87). She said that in both
years she received the RE/MAX Executive Club Award, which was based on
commissions, and her commissions were just enough to put her in the top half
among agents in her office (Exhibit 2 to Exhibit A-1, 3rd page).
[24]
In cross-examination, she said
that she was obligated by law to keep her files on her clients for a long
period of time (homes shown, whether sold or not). She said, however, that she
could not extrapolate from those files the mileage driven in a year for her work
because one house shown does not necessarily mean only one trip to that house
(sometimes, for whatever reason, you cannot access the house at the time
planned). She reiterated that the effort to compute the hours driven for work purposes
would likely compromise her ability to earn a living (transcript, p. 119).
[25]
She also acknowledged in her
cross-examination that she stated in Exhibit A‑2, paragraph 6,
that for every listing in the years at issue her RE/MAX office required
originals of all paperwork, meaning that she would have had to stop by at the
office. In 2006, she stated in examination in chief, she made 16 closings,
which means that she would have had to go to the RE/MAX office more than once a
month. She simply replied to that that she had not been accurate in that part
of Exhibit A-2, that there had been an oversight (transcript, pp. 126-127).
[26]
In re-examination, the appellant
explained why she had a workstation at RE/MAX. She said that it cost her $300
per month and that the broker would take 30 per cent of her commission on every
sale until she had earned $40,000 in commissions. If she had not paid for a
workstation, the broker would have taken a lesser percentage of her commissions
(5 per cent instead of 30 per cent), but would have charged $900 a month for
the privilege of working with RE/MAX. She explained that by keeping her monthly
fees lower she was able to have a financial safety net, as RE/MAX was taking
its money only when she had sales (transcript, pp. 130-132).
[27]
The respondent filed an affidavit by
Adrienne Lake, a manager with RE/MAX Aboutowne Realty in Oakville (Exhibit
R-1). She stated, among other things, that the office has about 30-35
workstations for the salespeople associated with the office. She also stated
that most of the 80 agents/salespeople do not have an assigned workstation. The
appellant has an office permanently assigned to her at the RE/MAX place of
business, that she shares with two other agents, and that she had such an
office in the years at issue. The appellant has an assigned workstation with a
telephone extension in that assigned office, and she has a personal mail slot.
Ms. Lake could not, however, comment on the particulars of the appellant’s work
or driving schedule (par. 20). She confirmed that the appellant won an
Executive Club award in 2005 and 2006, which means that she made over $50,000
in the year in commissions. Ms. Lake also stated that 17 or 18 agents made
over $100,000 in commissions in 2009, and 5 or 6 agents earned over $250,000 in
commissions in that year.
[28]
The appellant seeks a decision
that will determine what obligations a real estate salesperson must meet in
order to prove the amount of driving done for business purposes. The appellant
states that keeping a log book is hardly feasible and is not a requirement
under the ITA. The appellant stated that the trade record sheets required by
the Ontario Real Estate Association, and referred to in her cross-examination,
are no help in determining how much driving is done because what is required on
those sheets is related to offers and sales, not to driving. Further, the
situation has changed significantly since 2000 in that agents can now access
MLS from their home office. There is no need to go to the broker’s office as
often as in the past. In the case of the appellant, her principal place of
business is her home, and the moment she gets in the car, it is for business
purposes, even though she goes to the RE/MAX office once in a while to drop off
offers when she cannot e‑mail or fax them, or to attend a meeting there
to promote one of her listings. In the appellant’s view, the mere fact that she
did not keep a log book does not mean that she did not use her car for business
purposes 95 per cent of the time. The position taken by the respondent is,
according to the appellant, arbitrary, unreasonable and not based on the real
facts. She relied on the case of Qureshi v. Canada (Minister of National
Revenue), [1991] T.C.J. No. 834(QL),
in which Judge Tremblay, as he then was, held that it is not necessary to
keep a log book to show how much an automobile is used for business purposes,
as this is not required by section 230 of the ITA.
[29]
For the respondent, the real issue
is a question of fact, namely determining the proportion of business versus
personal driving. This is not about log books. However, section 230 of the ITA
requires a taxpayer to keep records and books of account. The respondent states
that that requirement exists to enable the authorities to determine the tax
payable, whatever it may be. By keeping driving records, the taxpayer provides
some kind of objective evidence.
[30]
In the respondent’s view, the
appellant was very general in her testimony. It would not have been too
burdensome for her to keep records of her personal driving. In Njenga v.
Canada, [1996] F.C.J.
No.1218 (QL), the Federal Court of Appeal
said that the taxpayer was responsible for documenting her own personal affairs
in a reasonable manner. In Watts v. Canada, [2005] T.C.J. No. 515 (QL), Sarchuk J. required a log
book for a taxpayer claiming motor vehicle expenses as employment expenses. In
the Watts case, the taxpayer earned $2,500 in the
year and alleged that 87% of the use of the vehicle was related to work. The
respondent argued that in the present case, the appellant declared $7,335 (see Reply
to the Notice of Appeal, par. 8) as net business income in 2005 and
claimed 95% for business travel. According to the respondent, there is not a
big difference between the present case and the Watts case. In Chrabalowski
v. Canada, [2004] T.C.J. No. 488 (QL), Bowman A.C.J., as he then was, took into account the fact that the
taxpayer did not keep a log book in upholding the assessment reducing the
automobile expenses incurred for work purposes. He stated at paragraph 13
that he did not think that it was a particularly onerous task for a person
claiming employment expenses to keep a record of these expenses as well as a
log book of automobile expenses. Finally, the respondent does not seem to
challenge the view that, when the taxpayer has his or her principal place of
business at home, any driving from home for work purposes is a business use of
the vehicle (see Canada v. Cork, [1990] F.C.J. No. 429 (QL)). However, the respondent is of the view that when the
appellant drives from her home to the RE/MAX office, that is personal use (counsel
for the respondent referred to Webb J.’s decision in Rawlinson v. Canada,
[2009] T.C.J. No. 391 (QL)).
Analysis
[31]
Subsection 230(1) of the ITA reads
as follows:
230. (1) Every
person carrying on business and every person who is required, by or pursuant to
this Act, to pay or collect taxes or other amounts shall keep records and books
of account (including an annual inventory kept in prescribed manner) at the
person’s place of business or residence in Canada or at such other place as may
be designated by the Minister, in such form and containing such information as
will enable the taxes payable under this Act or the taxes or other amounts that
should have been deducted, withheld or collected to be determined.
[32]
The appellant will be able to
deduct her motor vehicle expenses to the extent that she can prove that she
incurred them to earn her commission income. It is not disputed that she is self-employed,
and thus, it is section 18 of the ITA which applies. Paragraph 18(1)(a)
states:
18. (1) In computing the income of a
taxpayer from a business or property no deduction shall be made in respect of
General limitation
(a) an outlay or expense except to
the extent that it was made or incurred by the taxpayer for the purpose of
gaining or producing income from the business or property.
[33]
The appellant also must establish
that the expenses claimed are reasonable. Section 67 of the ITA reads as
follows:
67. In computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise deductible under
this Act, except to the extent that the outlay or expense was reasonable in the
circumstances.
[34]
I agree with the appellant that
keeping a log book for automobile expenses is not specifically required by the
ITA. However, by not doing so, she faces a heavier burden in proving that she
used her motor vehicle almost exclusively for business purposes. The question
to be resolved here is a pure question of fact. The appellant is the only one
who knows exactly what use she made of her car in the year. At the same time,
the Minister’s role in auditing a taxpayer is to ascertain whether he or she has
complied with the ITA. In this case, the Minister cast doubt on the claim that
95% of the appellant’s travel was for business purposes. The Minister rightly
assumed that every person has personal needs and determined that, absent any
other objective evidence, 55% would be a more appropriate figure for business
travel.
[35]
It is my understanding that the
appellant asked Mr. Meehan to testify in order to, among other things, give
weight to her testimony that she really used her motor vehicle almost
exclusively for business purposes and that keeping a log book was practically
impossible. However, Mr. Meehan could only assume what the appellant’s driving
habits, and those of the sales agents working for him were. Apart from stating
that the sales agents are almost always in their cars, he did not have any
factual knowledge in this regard. With respect to log books, he said that
sales agents do not usually keep them, although they ought to, and testified
that he himself never kept one.
[36]
A log book has its usefulness. It
permits a taxpayer to demonstrate with greater accuracy the extent of business use
and of personal use. Although I understand that keeping a log book may be tedious
and may not always be practical when one is with clients, the appellant did not
convince me that she "would lose all of [her] clients" or that the
effort to compute her hours driven for work purposes would "eclipse [her] ability
to earn a living" or "bottleneck [her] performance". I
understand that she did have to visit many houses and quite a few neighbourhoods
in her new territory and that she covered a wide area. The reality is that she
closed 13 transactions in 2005 and 16 in 2006. I think she would have had time
to enter the required information in a log book at the end of the day.
[37]
The expenses claimed must be
reasonable pursuant to section 67 of the ITA. At first blush, claiming 95% of
the automobile expenses as having been incurred for business purposes is not
reasonable. Everyone has personal needs. This is why, if it is true that the
appellant drove her car for business purposes 95% of the time, the necessity
for a log book is all the greater. If she did not have time to report all her
business driving, which I seriously doubt, she could have reported her personal
driving. When a taxpayer claims a more reasonable amount, the need for a log
book to convince the authorities or the court becomes less critical, as one can
easily imagine the amount of driving required in a given industry (as in Qureshi,
supra, referred to by counsel for the appellant).
[38]
Here, the appellant had an office
at home but also had one at the Re/max brokerage in Oakville, where
she did have to attend periodically, i.e. at least once a month. Her mother
lived in Toronto and the appellant visited her there once in a while.
What was personal use of the car and what was business use is not crystal clear
from the evidence before me.
[39]
The appellant filed in evidence a
proposal made by the Minister to allow 75% of the motor vehicle expenses as
being related to business use (Exhibit A-5). In the circumstances, I find this
proposal reasonable.
[40]
I will therefore allow the
appeals, without costs, and the reassessments will be referred back to the
Minister for reassessment and reconsideration on the basis that 75% of the motor
vehicle expenses shall be allowed as having been incurred for business purposes.
Signed at Ottawa,
Canada, this 3rd day of November 2010.
"Lucie Lamarre"
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